Long-term care insurance policies were first offered to the public by insurance companies at about the time when Medicare came into being in 1966, a time in which the insurance industry was not known as being in the vanguard of computerization. These first policies were developed when almost everyone confined to a nursing home was elderly and unable to take care of themselves because of chronic cognitive or physical impairments. That is, their health conditions had deteriorated to the point that they were no longer able to take care of themselves without the assistance of another person. They were not expected to recover from those conditions. And, health care provided in a patient's home by skilled medical professionals was virtually non-existent.
As a result, the first long-term care insurance policies covered only nursing home care. Pricing the policies was difficult because there was very little data--seemingly only the average length of stay and average daily cost of care was available to assist insurers. Further, computer modeling techniques and predictive tools apparently were not being utilized. Thus, the fast policies provided fixed benefits without regard to patients' actual health conditions, that is, their medical, physical, and mental states of health.
Under a fixed-benefit arrangement, insured persons select a specific benefit amount at the time they apply for a policy. The benefit amount could be expressed as a daily, weekly, monthly, or other periodic manner. The benefit amount could also be expressed as a flat amount that, upon qualification, will be paid regardless of the cost of the care received. Or, it could be expressed as a periodic limit in which case a patient's qualified expenses will be paid up to that limit. Under a fixed-benefit arrangement, neither the flat amount nor the limit could be increased solely because a patient's health condition deteriorated after the patient qualified for benefits.
Sales of such nursing home policies remained low for almost twenty years, resulting in a corresponding low demand for advances in computer science as applied to such policies. Other than minor improvements, the policies continued to provide only nursing home benefits until two things occurred. First, surveys showed that 75% to 80% of all seniors strongly preferred to receive care at home; only 1% to 2% preferred a nursing home.
Second, beginning in October 1983, in response to rapidly rising hospital costs, Medicare began to reimburse hospitals using a prospective payment system based on Diagnosis Related Groups (DRGs). Before this change, seniors covered by Medicare remained hospitalized until, in most cases, they required only minimal assistance after discharge; this provided hospitals with a very strong financial incentive to keep patients hospitalized for as long as possible. But under the prospective payment system, each patient was assigned to one of 472 different DRGs, each of which had a specific dollar amount allotted to it. The dollar amount was based on the relative severity of the medical condition for the average patient. Except in extraordinary cases, Medicare paid the hospital that dollar amount for the patient's treatment, regardless of the severity of the patient's actual medical condition. In most cases, if the patient remained hospitalized too long, the hospital spent more for the patient's care than it received from Medicare.
Thus for the first time, hospitals had a very strong financial incentive to release patients before their Medicare money ran out. In 1968, the average hospital stay for seniors was 14.2 days; in 1982, the last year full before the prospective payment system was implemented, the average hospital stay had dropped to 10.1 days; and in 1996, the average hospital stay was only 6.6 days.
Today, almost half of all senior patients need skilled medical care--care that cannot be provided by friends or family--during their recovery after release from a hospital. Technological advances now allow most care provided in a nursing home to be provided in patients' homes. Thus, whether patients recover in a nursing home or in their own home now depends more often on what they can afford. Because home health care for recuperating patients is frequently more expensive than nursing home care, and because the combination of Medicare and private Medigap insurance policies can pay 100% of the costs for nursing home care during the first one hundred days, most recuperating patients are sent to nursing homes even though 75% to 80% strongly prefer to recover at home.
Whereas 30 years ago most nursing home patients were old, feeble, and at the end of their lives, today's "quicker and sicker" hospital discharges have dramatically changed the type of patients in nursing homes. Today, approximately 72% of the seniors who are sent to nursing homes typically stay for less than 90 days while they receive skilled medical care to recover after a hospital confinement. Contrary to the fears of many seniors, nursing homes are no longer "the end of the road;" indeed, 91% of Medicare's nursing home patients recover and are sent home to resume their lives.
However, the inventors herein believe that the insurance industry did not adequately respond to the shift in the delivery of health care services. Newer versions of the old policies did include benefits for home health care, but with very little reliable information available to actuaries, insurers simply extended their old concepts for nursing home benefits to the new home health care benefits and increased their premiums accordingly. The insurers did not change the way they determined benefit amounts for nursing home care, irrespective of the wide variance in the costs of providing care for seniors with different health conditions.
At first, most companies limited home health care benefits to 50% of the amounts payable for nursing home care, but the policies still did not sell very well: They were too expensive for most people. Gradually, companies began to offer newer policies in which home health care was optional, and other policies that provided only home health care benefits. And, many companies began to offer equal benefit amounts for both home health care and nursing home care. While the rate of sales did increase somewhat, only about 2% of people age 50 and older are covered by these policies even though long-term care represents the largest potentially devastating financial risk for most seniors.
The newest versions of the policies include additional improvements. Benefits are now available for care provided in alternatives to nursing homes such as assisted living facilities. But all known policies still use the old fixed-benefit concept, with benefit amounts crudely based on where the care is provided, and for home health care, sometimes on the type of care provided. The inventors herein have observed a general lack of appreciation by the insurance industry of the problems that can be caused by basing benefits on the widely varying actual costs of providing care to patients with very different, specific health conditions; such problems can include financial and emotional harm, particularly for people recovering after a hospitalization.
Home health care frequently costs more than nursing home care; it is one-on-one care whereas nursing home care is shared among many patients. This is particularly true for patients recovering from more severe health conditions. For example, if a patient requires 24-hour-a-day nursing care during the first days of recovery, home health care typically costs $30 an hour ($720 a day). But, very few of today's policies include benefit amounts greater than $150 to $200 a day. Yet, most policies with home health care benefits are sold to seniors with a strongly implied promise that they will keep people out of a nursing home. Thus, seniors who count on their policies to keep them at home often find themselves recovering in nursing homes, unless they spend their hard-earned savings to pay for expenses they thought would be covered by their policies.
Today's fixed-benefit long-term care policies provide an inequitable distribution of benefit amounts in that they can pay some patients (i.e., the stereotypical patients who require only maintenance or custodial care) more than the cost of their care, while depriving higher benefit amounts from recovering patients for whom the cost of care often is much greater. Thus, recuperating patients often must spend assets which would otherwise allow them to maintain their standards of living. On the other hand, stereotypical patients do not necessarily profit from excess benefit amounts; indeed, they can suffer emotional harm as a result.
Excessive benefit amounts for nursing home care and often inadequate benefit amounts for home health care encourage some families to put stereotypical patients into nursing homes prematurely (sometimes referred to as "patient dumping"), thereby relieving the families of some of their own financial and emotional burdens. Excessive benefit amounts also encourage some nursing homes to discriminate against higher-cost recovering patients by denying them admittance, preferring instead to admit lower-cost custodial care patients, especially those covered by private insurance, thereby facilitating patient-dumping.
Because of Medicare's and Medicaid's continuing budget constraints, long-term care providers usually operate under constant financial pressures. All too often, cash-strapped nursing homes and unethical home health care providers perform additional unneeded, low-cost, but high-profit services in order to increase their billings up to the maximum benefit amount available to a patient. Some insurance companies attempt to discourage this billing abuse by paying only actual expenses, up to maximum benefit amount limits. However, preventing billing abuse means that they must hire more experienced and more expensive claims personnel to investigate claims much more thoroughly. Thus, savings arising from the prevention of billing abuse can easily be spent on higher claims administration expenses.
One of Medicare's key requirements for skilled nursing facility (i.e., a kind of nursing home) benefits is that a patient must be confined to a hospital for at least 3 days prior to going into a nursing home. Because of continuing cutbacks in Medicare, an ever-increasing number of patients are being discharged before meeting that requirement even though they require skilled medical care to recover. For example, many seniors who undergo major joint reconstructive surgery, including total hip and knee replacements, are being discharged after only two days even though they still need skilled medical care such as nurses to change bandages and give shots of antibiotics to prevent infection, physical therapists, etc. If they want to recover at home, they also need assistance with bathing, dressing, meal preparation, laundry, housekeeping and other daily chores.
With today's long-term care policies focusing on the situs of the care, these recovering patients have two choices. First, if they go into a nursing home, Medicare provides no benefits and their long-term care insurance policies will probably not cover all of their expenses; the fixed-benefit concept did not contemplate recovering patients for whom costs are higher than the routine custodial and maintenance costs charged for the stereotypical nursing home patient. Thus, recuperating patients must spend more of their hard-earned savings for nursing home care, much of which would have been covered by Medicare were it not for Medicare's financial pressures on hospitals causing them to release patients "quicker and sicker." Second, if the patients want to recover at home, they must rely on a combination of their long-term care insurance policies, Medicare, and their own personal savings to pay for their care. While Medicare does pay for 100% of the home health care required by some patients, Medicare on average pays only 41% of all billed home health care expenses. Because home health aides charge $9 an hour or more, often with a 4-hour minimum billing, an insurance policy with home health care benefits can be inadequate to meet a patient's needs, particularly if highly-skilled care (nurses or therapists) is also needed. As a result, the patient, or the patient's family, must somehow make up the difference.
To save money, friends and family members often provide non-medical assistance during a patient's recovery. This costs caregivers tens of millions of dollars in lost wages each year. And, a recent study found that 31% of the families of seriously-ill patients spent most or all of their life savings on the unreimbursed costs of home health care. Medicare provides no benefits for maintenance or custodial care at home or in a nursing home. Thus, people who have developed cognitive impairment (Alzheimer's Disease or senile dementia), or lost the ability to perform some of the normal activities of daily living without the assistance of another person must rely upon friends and family, their savings and their long-term care insurance policies to provide and pay for the care they need. These conditions are degenerative; that is, as time passes, patients need ever-increasing care. Once their benefit amount maximums have been reached, today's fixed-benefit insurance policies force patients to spend their life savings more and more rapidly until they eventually become impoverished and qualify for Medicaid. As a result, patients' spouses and their families often suffer a steadily-decreasing standard of living as their assets diminish. In many cases, especially when home health care is no longer affordable, this results in premature confinement in a Medicaid nursing home, with the concurrent loss of independence for the patient, an emotionally devastating event.
Finally, the high cost of today's policies discourages people from purchasing this vitally important protection. It is very difficult for a 72-year-old to justify paying $150 a month for a policy that provides a benefit amount of only $100 a day for a maximum of only 2 years. The perceived imbalance between benefits and premiums causes adverse selection for an insurance company. That is, the healthiest people tend not to buy the policies, and of those who do become insured, healthier people tend to lapse their coverage more frequently than people who are likely to become sick. To combat the effects of adverse selection, premiums have to be kept high. This results in what seems to be a circular trap for insurance companies, and causes significant numbers of seniors to be without proper insurance protection when their need arises.
The failure to appreciate the problem and business-as-usual momentum of the insurance industry has resulted in little or no effort to even attempt to solve the true underlying problem. The state of the art is represented in an article published in the Chicago Sun Times, on Dec. 21, 1994, by Spencer Rich, titled "III Relatives Cost Families Life Savings", reporting on a study of 2,661 adult patients released from five medical centers. (See also Journal of American Medical Association "The Impact of Serious Illness on Patients' Families" Covinsky et. al, Dec. 21, 1994.) "All told, 31% [of the families of seriously ill patients] used up all or most of their life savings on the unreimbursed cost of home care, health aides, special transportation and related medical costs." Two years later, essentially the same conclusion was expressed in an article in the May 1996 Best's Review Life/Health Ed. by Ron Panko, who cited Steven Devlin, Ph. D. Associate Director of the Boettner Center of Financial Gerontology at the Univ. of Pa., reporting on a study of 5,800 families nationwide showing that in the last six months of their parents' lives, 31% of the families spent all of their life savings on their parents. "That's frightening for families," he says. "You may be 70 and your mother is 90, and you are spending all of your money caring for her."
For too long, it has been a business as usual approach, with patients and their friends and families suffering devastating losses.